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Payroll issues can feel overwhelming for any small business and especially startups. Payroll is often the biggest recurring expense. It requires pin point accuracy and mistakes can be costly. Lucky for us my next guest, Charles Read, a certified public accountant and a U.S. Tax Court Practitioner will explain how to conquer the most common payroll issues
What You’ll Discover About Payroll Issues (highlights & transcript):
- What payroll issues need to be addressed in the hiring process [2:25]
- How an employee handbook can help lower unemployment taxes [3:03]
- The payroll issues regarding worker classification [6:53]
- How a biweekly payroll simplifies and solves multiple payroll issues [12:09]
- Recordkeeping payroll issues [13:51]
- What to do when the Tax Man comes knocking [22:17]
- How to hire a payroll service equipped to properly handle your payroll issues [18:06]
- And much MORE
Hanna Hasl-Kelchner: [00:00:00] Payroll issues can feel overwhelming for any small business, and especially startups. Payroll is often the biggest recurring expense as a business has, and it requires pinpoint accuracy because mistakes can be costly. And luckily for us, my next guest, a certified public accountant and a you see tax court practitioner, will explain how to conquer the most common payroll issues and come out ahead.
Announcer: [00:00:27] This is Business Confidential Now with Hanna Hasl-Kelchner helping you see business issues hiding in plain view that matter to your bottom line.
Hanna: [00:00:39] Welcome to Business Confidential Now, I’m your host, Hanna Hasl-Kelchner, and today’s guest is Mr. Charles Read. He’s an accomplished senior executive and entrepreneur with more than 50 years of financial leadership experience in a broad range of industries and the author of four books, the latest one being The Payroll Book, A Guide for Small Businesses and Startups.
Hanna: [00:01:02] Charles is eminently qualified to write The Payroll Book. He’s a certified public accountant, a U.S tax court practitioner, a member of the Internal Revenue Service Advisory Council, and the founder of GetPayroll. Charles’ companies have provided full-service payroll services, payroll tax services and other payroll related services since 1991. I’m delighted to have him join me today to pull back the curtain on payroll. Welcome to Business Confidential Now Charles.
Charles Read: [00:01:33] Hanna thank you very much. It’s a pleasure to be here.
LEGAL DISCLAIMER: ANSWERS TO PAYROLL ISSUES ARE JURISDICTION SPECIFIC
Hanna: [00:01:35] Well, it’s a pleasure to have you here. Before we get started and really rolling here, I am going to put my lawyer hat on for just two seconds and note that the laws governing payroll can differ from state to state and country to country. So what that means for you is while the specific answer to a payroll question is dependent on your local law and is unique to your state, the questions that need to be asked, the issues, the things you need to be aware of and have on your radar screen as a business owner or senior decision maker are not unique. And those are the things we’re going to talk about today.
Hanna: [00:02:12] So having said all that, let’s start with the basics. Charles, as a small business owner who’s hiring some help, maybe for the first time, what should they be thinking about when it comes to payroll?
PAYROLL ISSUES TO ADDRESS IN HIRING PROCESS
Charles: [00:02:25] Well, payroll, of course, is integral to employees. I mean, that’s what they work for you for, so. It’s so integrated into your business; it has to be part of how you think about everything in the hiring process. You need to talk about salary. You need to talk about status, whether they are going to be exempt from overtime or whether they are going to be subject to overtime rules or whether they’re going to be salary. How many hours they’re going to work, what the work week is, all these kinds of just basic things.
Charles: [00:03:03] Then you need an employee handbook that describes all this in detail, sometimes in excruciating detail to protect you legally. If there is a misunderstanding or a disagreement, the employee handbook becomes your contract with your employee. And it’s how the law is going to look at what you do in regards to that employee.
Charles: [00:03:27] Then the government gets involved. They’re going to set minimum wage. Minimum wage is in flux. States and municipalities are changing it. Myself, I’m in the Texas area. The city of Dallas decided to implement a special minimum wage for if you worked in the city of Dallas, which, of course, Dallas is a commuting city and people work in and out of it all the time. It would have been a nightmare. The state stepped in and said, no, the city can’t do that at the moment. That could change with the next administration.
HOW TAXING AUTHORITIES CREATE PAYROLL ISSUES
Charles: [00:04:02] So you have minimum wage, then taxes. Every organization, every authority wants their share. There are in the U.S over 15,000 taxing authorities. These start with the IRS and go down to things as small as the Philadelphia school district charges employment taxes. It’s becoming a favorite thing for cities to implement.
Charles: [00:04:31] San Francisco’s implemented a new one. Seattle’s implemented a new one. The city of Indianapolis and Kansas City and New York City have had their taxes for many years. So you have all kinds of levels of taxes, both on income, which is normally withheld from the employee. It can be income tax. Then you have Social Security and Medicare. And depending on how much you make that varies. There’re limits to Social Security unless you make too much and then they kick it back in again.
Charles: [00:05:06] Then on top of that, there’s 43 states that have state income tax and they withhold from the paychecks. So in most of the states you have state income tax, but then every state has state unemployment tax, which is a tax on the employer. And how you hire and fire people determines to a great extent what your state unemployment tax rate is. And it could be from several thousand dollars a year per person down to maybe less than twenty-five dollars per person, depending on how you hire and fire, how you pay them and how often you fire them.
Charles: [00:05:48] If you fire them without cause, your rates are going to go up. So you have to structure in the very beginning the terms of which you can terminated employee and what is “cause.” That goes in the handbook. So if you said in the handbook, for instance, three unexcused absences, and you defined unexcused absence, is grounds for termination and then you terminate them, you don’t get charged against your own employment. But if you don’t have that in your handbook and after three unexcused absences, you terminate their employment, they’re going to get their unemployment and it’s all going to be charge back to you. The employer.
Hanna: [00:06:30] Yes. And taxes make people’s eyes glaze over. I remember I had a tax professor once and he always asked a question and somebody invariably had the wrong answer. And he goes, “yes, and that’s what the plaintiff argued. The tax court didn’t agree. So, you know, you never had a wrong answer. We loved him. As a matter of fact, we nicknamed him Tex. So it’s kind of curious, you’re here in the Dallas area.
PAYROLL ISSUES REGARDING WORKER CLASSIFICATIONS
Hanna: [00:06:53] But before we get into the weeds with taxes, let’s go back to something that you mentioned earlier about classification, whether somebody is going to be hourly or salary. You know, I heard of one startup in New York that decided, you know, we’re not going to get into that mess. We’re just going to make all of our six figure senior executives who are starting up this great business outside contractors. What do you think of that?
Charles: [00:07:23] It’s called tax fraud. It’s a felony.
Charles: [00:07:27] And that’s the other classification, it’s independent contractor versus employee.
Charles: [00:07:34] The U.S Labor Department estimates that 70 percent of all U.S. businesses misclassified people. 70 percent.
Hanna: [00:07:43] Well, how hard is it to classify somebody?
Charles: [00:07:46] It’s can be almost impossible in some instances.
Charles: [00:07:50] Now, if you have somebody that’s coming in and, you know, they’re pulling stuff off the shelf and putting it in boxes and shipping it out, you’ve got to pay them over time. It’s real simple. OK, but if they’re a professional, if they’re a teacher, if they’re a computer programmer, if they’re highly compensated, there’s a whole lot of rules that say these people are exempt from overtime.
Charles: [00:08:17] And it’s not just how much you pay them. You can’t choose. You can’t say I’m going to put you on salary and not pay you overtime. You have to follow the law. If you don’t, when they audit you, you’re going to pay the price. You’re going to have to pay all the overtime and then you’re going to have to pay all the taxes you didn’t pay. And you’re going to have to pay penalties and interest on top of it. It can be extraordinarily expensive. I’ve seen clients literally be put out of business over it.
Hanna: [00:08:45] Well, that’s why they need advice from someone like you.
Charles: [00:08:49] Absolutely. And then, independent contractor versus employee. For instance, if you start a corporation and you work in it, you’re an employee. Whether you think you are or not, you are. But an independent contractor. There’re basically 20 common law rules that determine whether you’re an independent contractor or not. And they include who sets the schedule. Can you make a profit or a loss? Are you at risk? A number of other things.
Charles: [00:09:20] The IRS didn’t like them. They’ve set their own set of rules that they prefer. And just recently, the Department of Labor has put out a new set of rules for determining an independent contractor. And they are a major change. And if they are approved, it’s going to be a major change how you determine an independent contractor versus an employee.
Charles: [00:09:44] Again, if you pay them as an independent contractor and the IRS or the state comes in and says, no, they’re an employee, all the taxes that you should have withheld that you paid them, you now have to pay and sue the employee to get it back, plus penalties and interest. Again, it can put you out of business. So you have to be very careful how you classify people.
Hanna: [00:10:12] And understand that there’s no real black and white rules about it. Some of it is pretty fuzzy and open to interpretation, which is why it’s always helpful to have someone with accounting experience, whether they’re a certified public accountant or someone who’s just done a lot of payroll, understand and help you make those determinations. So I think that’s pretty important. Let’s talk about payroll frequency, OK?
PAYROLL PAYMENT FREQUENCY
Hanna: [00:10:37] What if, you know, in small businesses in particular, cash flow is such a tough thing. At times it’s erratic. There are good months. There are not so good months. Can you pay somebody quarterly legally?
Charles: [00:10:51] No, you can’t.
Charles: [00:10:53] You can pay no less than monthly under federal law. And in many cases, you have to pay at least twice a month. Now, in some industries, particularly like labor, pure labor, weekly is still fairly traditional. Then there is a push on through, a lot of things basically started by Uber and Lyft and some of the other gig economy companies, to pay on demand. Literally, if you’re an Uber driver, you can get paid five times a day, I think. OK, and this makes it incredibly difficult for business to keep up with things.
Charles: [00:11:36] One of the conversations we had with the IRS last year and was written up as part of the SEC, the Internal Revenue Service Advisory Council annual report was all the questions on demand pay and how it could be regulated and when it would be taxed and what it was. And for instance, if somebody paid somebody and then they actually didn’t work. But you can’t get the money back. Is it payroll or is it a gift or is it theft? So there’s a lot of things in that.
HOW BIWEEKLY PAYMENT SOLVE MULTIPLE PAYROLL ISSUES
Charles: [00:12:09] Now we recommend for small business that they pay biweekly. There’s a reason for that. Biweekly makes it much easier to calculate over time because you have two fixed workweeks and overtime is always calculated on a workweek, which is 168 hours, basically seven days, 24 hours a day.
Charles: [00:12:32] And you have to fix it. You can change it occasionally. But basically you stay with a fixed one-hundred-and-sixty-hour workweek. It can be from 11:15 on Monday to 11:15 the following Monday. But it has to be 168 hours. And if they work more than 40 hours in that period, you pay them overtime. By having two set weeks it’s easy to calculate.
Charles: [00:12:53] If you do semimonthly, then you may have three different workweeks in a pay period. And that over time, you may not know until after you’ve paid people whether they were due overtime or not. So it can get very complicated. So we recommend to our small business clients, basically, they pay two weeks, they pay through a Friday, and the pay day is the next Friday that gives them a week to calculate payroll, get everything prepared that takes into event, Sally got sick and wasn’t there, there was a holiday, the power went out, the computer died. That gives them a whole week to get everything done and out and prevents most of the problems of timing. So it solves the overtime problem. It solves the logistics problem and it helps the cash flow.
PAYROLL RECORDKEEPING CHALLENGES
Hanna: [00:13:51] That’s sound advice. What kind of recordkeeping is involved for a new business to be tax compliant?
Charles: [00:13:58] Oh, that’s a whole chapter in my new book, OK, because there are a whole bunch of different people that have different recordkeeping requirements.
Charles: [00:14:12] The IRS has a whole list of things you have to do. The Department of Labor has another list of things you have to keep. Then if you have more than 50 employees, you have the Family Medical Leave Act that you have to comply with and report on and keep records on, then you have to keep records for the Civil Rights Act of ’64 and the American Disabilities Act of ’90 and keep records on all the people and how that affects them. Then you have the Age Discrimination in Employment Act of 1967. Then you have Immigration Reform and Control Act. All those things are federal.
Charles: [00:14:55] Then they’re state requirements for recordkeeping. So we basically tell our clients, keep everything forever, literally just put it all in a box, marked the year and put it in the attic.
Hanna: [00:15:12] Well, you still have to have a system for being able to comply with these things. So if I’m starting a new business, let’s say I’m established and I’m hiring people now, you know, they’re not my gig employees. They’re employees. How do I go about finding (a) what all needs to be recorded and then (b) set up the appropriate system to maintain those records and create those records?
Charles: [00:15:44] Doing it on your own is going to be tough, literally. You have to go to all the government entities that you may or may not know about and get their requirements or get some software that is written professionally that can do it for you or use a payroll service bureau such as us. And we’ll keep track of all that and we keep it forever.
Hanna: [00:16:10] How big does somebody have to be before they use a payroll service?
Charles: [00:16:13] They have to have an employee or a contractor, one.
Hanna: [00:16:18] Even one.
Charles: [00:16:19] Just one. . .
Hanna: [00:16:19] OK
Charles: [00:16:20] . . . because there is so much that goes on that just that one hiring that first person or even setting up your own corporation or LLC and becoming an employee yourself, the time you’re going to have to spend to keep everything illegal isn’t worth the cost.
HOW USING A PAYROLL SERVICE CAN SOLVE PAYROLL ISSUES
Charles: [00:16:42] We, as a payroll service bureau, do it for thousands of clients hundreds of times a day. We’ve got very expensive systems that we’ve paid through the nose for to do all this. Then you have somebody like me, and I’m not I’m not trying to brag on myself, but if you were to hire me full time, it would be well into six figures. You can get that as part of your payroll service fee.
Charles: [00:17:08] I’m there if my clients need me. They call my staff and they say we got this mess and they go on. I don’t know, they’ll say let me get you to Charles. Or you call and you’re not happy, so let me talk to Charles and I’ll pick up my phone and we’ll talk. It’s just not worth the effort.
Charles: [00:17:24] I determined 40 years ago that not to do payroll in-house, it just wasn’t worth the time and the expense to do it. I outsource it to jeez, I forgot it’s become Ceridian now. Many years ago was my first one and I’ve used all the majors before I started my own. And I recommend that you use a payroll service bureau. I do not recommend that you do payroll in-house, or you try and do it by hand.
Charles: [00:17:50] My father used to do it with a pen and paper and I got to be a CPA and I got into it and I finally convinced the old man, No, it’s not worth my time to come in and fix everything at the end of the year. Just use somebody.
HOW TO VET A SUITABLE PAYROLL SERVICE
Hanna: [00:18:06] So not everybody’s going to be able to use your services, necessarily Charles. So if they are going to be shopping for payroll services, what kind of questions should they be asking? How do they go about picking one?
Charles: [00:18:21] Ok, that’s an excellent question, Hanna. If you want one of the majors, you’re going to have to put up with being a number. When you call ADP, it’s a call center and you’ll never talk to the same person twice and if you have a problem, it’s going to take more effort to resolve that problem situation.
Charles: [00:18:43] If you go with a local company or a smaller company, or smaller national like us, you need to ask, do you do companies like me, do you understand the complexities of my industry? If you don’t do restaurants and I own a restaurant. If you don’t do restaurants, I don’t want to be your first one. There’re complexities there. If I’m a federal contractor and I have to have certified payroll and I go to payroll companies and say, “do certify payroll?” They say, “well, no, but we can.” Move on down the line. Don’t, don’t, don’t, don’t be the experiment. Don’t be the first guy. That’s one of the things.
Charles: [00:19:24] Next, do they have a CPA on staff? Do they take a [Form] 2848? That is important because with a [Form] 2848, the limited power of attorney from the IRS, I can go talk to the IRS on behalf of my clients. I can advocate for them as a professional. I know what the rules are. The IRS, if you’re a consumer, and I don’t say they do this deliberately, but they will tell you things that aren’t true. Many times they’ve been transferred in and are trained in a specific area and they’ll tell you what they think. You call back and get somebody else, they’ll tell you something else.
Charles: [00:20:11] I know what the IRS procedures are. I know what the IRS internal manuals are. I know what the regs are and the rules are because I do this for a living. So when I talk to them, many times I correct them or I point them to certain things that they have missed or don’t know or have ignored or whatever. And I deal with these people. I deal with the IRS at a very high level.
Charles: [00:20:37] For the last three years, we had a serious problem with a particular penalty and the IRS people were saying, well, we don’t care, it’s going to be this way. So I talked to the head of Nationwide, of Nationwide Penalties and asked him about it. And he said, no, it has to be this way. And I said, yes, I agree. May I use your name when I’m talking to Internal Revenue Service agents? He said, “Oh, absolutely.” I’ve not had a problem since because I use his name and it goes away.
Charles: [00:21:12] But the example, the analogy, I use is a consumer dealing with the IRS, if you take the best Brazilian soccer player, somebody like Pele, superb athlete, wonderful soccer player, and you put him in a New York Yankees uniform and you stick them in Yankee Stadium, he’s at a loss, a total loss. He doesn’t know the rules of the game. He doesn’t know the equipment. He may be a great athlete, but he’s at a total loss until he learns the system.
Charles: [00:21:40] So don’t try and do it yourself, but find somebody that can that knows your business, that knows your industry, that can work with you and help you when the state or the IRS screws up. Or you do. Either one.
Hanna: [00:21:58] Well, that’s really great advice. And I think that’s helpful for people that do need a payroll service. So they at least have a start in terms of questions and what to be looking out for, because just like any other product or service, the people offering it are going to try and sell you the moon. So that’s really good.
HOW TO HANDLE TAX INQUIRIES
Hanna: [00:22:17] But let’s take it a step further here. You know, mistakes happen whether you’re trying to work through your payroll yourself or you have a service. And you know, somebody was working on your account that wasn’t as knowledgeable as you would like. And all of a sudden you get a notice from the Internal Revenue Service. The taxman is knocking on your door. What do you do? Once the panic subsides and your adrenaline calms down, what should somebody do?
Charles: [00:22:50] Well, you know, you. Yeah, calm down. That’s the first thing. Second thing is to read the notice. A lot of the information is there. If it says, “well, we talk to you about it before,” but you don’t have that notice, you call and say, “hey, guys, I didn’t get that notice.”
Charles: [00:23:11] But when you’re dealing with the penalty, you want to answer every communication that you get from let’s just call it the IRS. Even if you get the same letter two weeks later, answer it again. Always be calm and rational when you start to explain why you don’t think it’s an error or why you think that penalty should be abated. You want to lay out in the very beginning all the rationale because they really don’t like it if you say why and then later change your story. So you want to be very careful to have all your ducks in a row when you start dealing with them.
Charles: [00:23:57] Now, when you go and respond to the IRS and you say this penalty should be abated because I didn’t do it, it didn’t happen. You made a mistake or it’s a simple mistake and shouldn’t be penalized. The first response from the IRS is always going to be no. Always. They’re always going to say no.
Charles: [00:24:18] They will send you the appeals rights. The second letter goes to the Appeals Coordinator and about five percent of the time you’ll get it abated. If you don’t get it abated, your next step is the appeals.
Charles: [00:24:31] You there’s several different routes to it, but you get to an Appeals Officer, which is a separate division and supposedly independent, though they all report to the Commissioner. And there’s where you’re going to get usually an experienced revenue agent that understands what it is and understands why the penalties exist and what they’re supposed to cover. And your chances of getting an abatement at that level are much greater.
Charles: [00:25:01] Again, always be calm and rational. If you get upset and start yelling at them, you lose.
Charles: [00:25:09] Whenever I go in to have a meeting with the auditor or for a problem, I always go in and get the first appointment in the morning and before he’s had a chance to get a nasty call from a taxpayer and get upset for the day. So these are real people.
Charles: [00:25:27] My staff is amazed because I’ll be talking to an IRS appeals officer and we’ll be talking about grandkids and pets and the house on the lake and all kinds of things before we ever get to the penalty. These are real people. They have husbands and wives and kids and grandkids and dogs and horses. And if you develop a community of interest with them, they’re much more reasonable and they will go, “well, OK.” So I don’t say it always works, but it doesn’t hurt. Getting on the wrong side just guarantees you they’re not interested.
Charles: [00:26:06] So you never give up. And even if appeal says no, you then can go to Tax Court if you wish. There’s always another step up to the U.S. Supreme Court. So it’s a whole series of no’s followed by a single yes.
Charles: [00:26:24] We have had cases take as much as eight or nine years to resolve. We had a penalty for a client. It was $85,000. I worked up through appeals. I went to the Appeals Supervisor. I went to the Director of Field Operations and I finally went to the Head of Appeals. Got the thing reheard all over again, and they abated the entire penalty. But it took nine years.
Hanna: [00:26:54] The wheels of justice grind slowly. But I appreciate your persistence. That’s wonderful. And actually, this has all been really great advice, Charles.
Hanna: [00:27:05] For our listeners, if you’d like to learn more about the payroll’s ins and outs, because they’re certainly there and they’re important and they matter to your bottom line, especially if things go awry and the taxman comes knocking because penalty and interest. It seems like one big word to them and they love it. His book is The Payroll Book: A Guide to Small Businesses and Startups. You can find it at your favorite bookseller and of course, always on Amazon. So thanks so much for joining me today Charles.
Hanna: [00:27:36] That’s our show for today. But don’t go anywhere. I have a really easy ask for you. Would you please open your podcast app and give us a five-star review and leave a comment about what you love most about the show? I do read them all and it’ll take you less than a minute. And while you’re at it, share this episode, tell someone about it, because the best way to grow our audience is by word of mouth. And if you want the detailed show notes, links to connect with my guest or stuff that we talked about, even if you want to ask a question or have a show idea come on over to BusinessConfidentialRadio.com.
Hanna: [00:28:08] I’ll catch you on the next episode. And in the meantime, have a great day and even better tomorrow.
Guest: Charles Read
Charles Read is an accomplished senior executive and entrepreneur with more than fifty years of financial leadership experience in a broad range of industries. He’s author of four books, the latest one being The Payroll Book: A Guide for Small Businesses & Startups.
Charles is eminently qualified to write The Payroll Book. He’s a Certified Public Accountant (CPA), U.S Tax Court Practitioner (USTCP), member of the Internal Revenue Service Advisory Council (IRSAC), and the Founder of GetPayroll. Charles’ companies have provided full-service payroll services, payroll tax services, and other payroll-related services since 1991.
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